OPINION: Dreamliner break-even remains a moving target

11 August, 2017

SOURCE: Flight International

BY: Flight International

If industry forecasts are reliable, there are about $5-6 trillion in aircraft deals available for the taking over the next 20 years, but the number that is reshaping the industry right now is a more modest $28.6 billion.

That represents the peak of Boeing’s deferred costs on the 787 programme and a number the company must surmount for the widebody to break even.

Although doubts have lingered that the 787 will ever get there, a faint light now flickers at the end of this particular tunnel – but it remains distant. It may take Boeing more than a decade of continuous production at the fastest rate in widebody history for the 787 to achieve profitability.

AirTeamImages

In an industry that expects to produce one new clean-sheet aircraft design once every 10-15 years, no company can survive such timescales for return on investment for long. Indeed, the fact that Boeing is enjoying a stock market resurgence is driven by another historic anomaly: an uninterrupted, 15-year growth in annual aircraft deliveries.

So it is not surprising to see Boeing attempting to upend not only its own business, but also the structure of the supply chain: avoiding another 787-sized debacle seems to be driving its entire strategy.

But underpinning that move are two assumptions that will surely be tested before Boeing’s next clean-sheet aircraft is ready to enter service.

First is that demand for commercial aircraft will continue its long-term upward trajectory, allowing suppliers to trade lower costs for additional volumes. The second is that the supply chain has no alternative but to yield to Boeing’s cost pressure.

With backlogs measured in years across the industry, the outlook for commercial demand appears strong. But how suppliers respond to Boeing’s price pleas is another matter.

Many companies have found a way to balance ­Boeing’s demands with their own business plans. Spirit AeroSystems, for example, is the latest to agree long-term pricing with the airframer.

But there are other signs that suppliers are pushing back. Indeed, Boeing’s cost pressures are mainly ­driven by the industry consolidation of the past two decades that has eroded competition throughout the supply chain.

As rumours stir of more mergers and acquisitions – such as last week’s report of a United Technologies bid for Rockwell Collins – the industry might have found a way to dig in its heels.